Mondi's 2011 full year net income up 47.3% year-over-year to €330M; net sales up 2.3% to €5.74B on improved demand

JOHANNESBURG , February 23, 2012 (press release) – Full year results for the year ended 31 December 2011
Highlights

  • Record financial performance
    • underlying operating profit up 36%;
    • earnings per share – alternative measure up 57%; and
    • return on capital employed of 15%, significantly in excess of through the cycle target of 13%.
  • Excellent cash generation
    • net debt down 39% to €831 million; and
    • free cash flow of 72 euro cents per share, up 72%.
  • Significant contribution from Syktyvkar modernisation project
  • Successful demerger of Mpact, further focusing Group strategic priorities  Investment grade credit ratings from Standard & Poors’ and Moody’s Investors Service  Proposed full year dividend of 26.0 euro cents per share, up 30%

David Hathorn, Mondi Group chief executive, said:

“The Group’s focus on performance, low-cost operating model, and robust financial position, enabled Mondi to deliver record results in 2011. This was against a backdrop of a strong trading environment in the first half followed by a more difficult second half as macroeconomic uncertainties weighed on our markets.

Our strong cash flow generation through the cycle enables us to ensure our asset base remains appropriately invested and exploit value adding growth opportunities, whilst maintaining our investment grade credit ratings and increasing returns to shareholders. In this regard, we have approved investments in certain high return energy and de-bottlenecking projects and launched a tender offer for the non-controlling interest in Mondi Świecie. Furthermore, the directors have recommended a final dividend of 17.75 euro cents per share, bringing the total dividend to 26.0 euro cents per share for the year, an increase of 30% on the prior year.

Looking ahead, while macroeconomic risks remain, it is encouraging to note that in recent weeks order books have improved and prices have stabilised, with price increases announced in certain grades. This should allow some recovery of price declines experienced over the course of the second half of 2011, although recent strengthening of emerging market currencies is impacting margins. Supply side fundamentals in our core grades remain good following further announcements of capacity closures in the industry.”

Overview of results

The Group’s underlying operating profit of €622 million was up 36% compared to 2010. The Group benefited from a generally positive trading environment, although a noticeable slowdown in demand in the second half led to some volume and pricing pressures when compared to the strong first half of the year.

The Europe & International Division, through its Uncoated Fine Paper, Corrugated and Bags & Coatings businesses contributed €611 million to underlying operating profit and the South Africa Division €62 million. The Newsprint operating loss of €18 million was disappointing, whilst corporate costs were at similar levels to previous years.

Input costs, particularly wood, pulp and recycled fibre, increased by approximately 7% compared to the prior year. This was mainly attributed to market price increases, offset in part by currency gains and lower volumes, although some softening in key fibre input costs was seen in the second half of the year.

Net finance charges of €111 million were €5 million higher than those of the prior year reflecting the lower average net debt, more than offset by lower net foreign exchange gains and reduced capitalisation of finance charges following the completion of the Syktyvkar modernisation project.

The tax charge, before special items, for the year was €102 million (2010: €88 million), representing an effective tax rate before special items of 20% compared to 25% in 2010.

The demerger of Mpact (formerly Mondi Packaging South Africa) and related consolidation of Mondi Limited shares was concluded during August 2011. Comparative figures in the income statement have been restated to reflect Mpact as a discontinued operation. The details of the transaction are more fully described in note 6 of the enclosed extract of the audited annual financial statements. Consequently, to reflect the continuing business of Mondi, the Group has elected to present an alternative, non-IFRS measure of earnings per share as if the recapitalisation and demerger of Mpact and Mondi Limited share consolidation had taken place at the beginning of each period presented. Basic earnings per share – alternative measure was 71.8 cents, an increase of 57% on the prior year.

In line with the increased turnover, working capital increased during the year with a net cash outflow of €68 million. The decrease in demand and selling prices, coupled with a focus on active inventory management in certain grades in light of the lower demand towards the end of 2011, resulted in some reduction of year end working capital levels compared to average levels during the year. The net working capital to turnover ratio was 10% at the year end, the bottom of our targeted range of 10-12%.

Capital expenditure of €263 million was €131 million lower than the prior year, reflecting the reduction in spend following completion of the major capital investment in Russia. Excluding major expansionary capital investments, the capital expenditure to depreciation ratio was 63%, unchanged from 2010.

Strong cash generation and the proceeds from the demerger of Mpact led to a reduction in net debt to €831 million at year end, from €1,364 million at 31 December 2010.
The Group is proposing to pay a final dividend of 17.75 euro cents per share giving a total dividend of 26.0 euro cents for the year, an increase of 30% compared to 2010.

Europe & International - Uncoated Fine Paper (UFP) business

Underlying operating profit increased by €26 million to €205 million. The Syktyvkar mill delivered a very strong result, benefiting from the first full year contribution from the mill modernisation investment completed in the second half of 2010. Together with a solid performance from the Ružomberok and Neusiedler mills, this more than offset the lost contribution from the sale at the end of 2010 of Mondi’s controlling interest in Mondi Hadera.

The ROCE of 16.7%, marginally down on the previous year, reflects the positive trading environment, low cost base and strong operating performance as well as the contribution from the Syktyvkar modernisation.

Average benchmark UFP prices were approximately 7% higher than in 2010, although they closed the year at similar levels to December 2010, reflecting some selling price pressure towards the end of the year. Product mix improvements also contributed to improved profitability. Sales volumes, excluding the contribution of Mondi Hadera in 2010, were largely flat. Sales into emerging Europe increased during the year to approximately 43% of total sales volumes.

Input costs increased versus the prior year. Wood costs were up on average in excess of 10%, although benchmark hardwood pulp costs were down around 4% per tonne on average. The Syktyvkar modernisation had the effect of reducing overall fibre input costs, as increased pulp self-sufficiency meant that higher wood usage was more than offset by the reduction in purchased pulp costs. Gas and electricity costs increased in both Syktyvkar and Ružomberok.

Productivity, measured in terms of output per person, improved by approximately 12% during the year, with annual production records in both Syktyvkar and Ružomberok.

The Syktyvkar modernisation project generated a return on capital employed in excess of 10% through increased volumes, energy sales and lower consumption of purchased pulp, with further benefits expected in 2012 as full ramp up is achieved. The business continues to focus on further optimisation with particular emphasis on energy, procurement and operating efficiencies. In addition, initiatives to improve forestry operations will be implemented over the next two years, with an expected increase in underlying operating profit in excess of €15 million per year.

Capital expenditure for the year was €61 million, of which €24 million related to the Syktyvkar modernisation project.

Europe & International - Corrugated business

The substantial improvement in the underlying profit of the Corrugated business in 2010 continued in 2011, reflecting the benefit of the improved trading conditions, recent capital investments and restructuring and cost reduction initiatives undertaken over the last few years. Underlying operating profit increased by 50% to €178 million. The profitability of the business and well invested capital base is reflected in the ROCE of 18.5%, improving from 14.9% in 2010.

The Syktyvkar containerboard machine rebuild, completed as part of the Syktyvkar modernisation programme, made a strong contribution, while the Świecie mill delivered a further significant improvement in performance.

Total containerboard sales volumes increased by 3% compared to 2010, with kraftliner and recycled containerboard volumes remaining largely unchanged whilst white top kraftliner volumes increased by 14%. Demand slowed in the second half of the year, necessitating some commercial downtime in the fourth quarter. The order book has improved during the first weeks of 2012 although demand for white top containerboard still remains subdued.

Average benchmark kraftliner prices increased by 14%, recycled containerboard prices by 20% and white top containerboard prices by 14% compared to 2010 levels. However, closing prices were down by 11% for kraftliner from 31 December 2010 and closing benchmark prices of all containerboard products were well below the highs achieved during the year. Price increases were announced in January 2012. The actual price increases achieved will be subject to individual negotiations with customers, and will take effect towards the end of the first quarter of 2012.

Box price increases more than offset the increased paper prices, leading to margin expansion and a significant increase in underlying operating profit, albeit off a low base.
Costs of recovered fibre and wood increased significantly during the year, with average benchmark recovered fibre prices increasing by 28%. Some relief was experienced in the second half of the year with recovered fibre prices dropping sharply off their highs. Wood costs increased in excess of 10% during the year. Fixed cost increases were largely inflation driven.
Productivity, measured by output per person, improved by 10% compared to the prior year. Capital expenditure of €44 million was incurred during the year.

Europe & International - Bags & Coatings business

The ROCE of the Bags & Coatings business of 19.0%, compared to 11.8% in 2010, reflects the very positive trading environment, particularly in the first half of the year.

A 71% increase in underlying operating profit to €228 million was largely due to significant selling price increases in kraft paper (approximately 20% increase in year-on-year average prices) and strong sales volumes during the first half of the year. Weaker end user demand and destocking in the value chain led to the kraft paper business taking significant downtime to manage inventory levels in the second half of the year. While weakness in end user demand in Europe was evident from early in the second half, export demand remained strong throughout the period, weakening only in the fourth quarter. Exports comprise approximately 55% of total kraft paper sales. Limited further downtime is anticipated during the first quarter of 2012 as the outlook is improving with evidence of an end to the destocking process. However, sales prices in the first quarter are down compared to average prices in the fourth quarter of 2011.

Increases in wood costs, currency headwinds and the detrimental impact of the commercial downtime taken negatively impacted the overall cost base.

Operating performance in all kraft paper mills was excellent, although downtime in the second half of the year impacted productivity. The total commercial downtime, the majority of which was taken towards the end of the third quarter and during the fourth quarter of 2011, amounted to approximately 10% of annual production capacity.

In the downstream industrial bags business, selling price increases more than offset increased paper input costs. Together with the benefits of integrating the Smurfit Kappa bag plants acquired in 2010, this gave rise to a significant improvement in underlying operating profit. Weaker end user demand impacted sales volumes in the second half of the year resulting in a small decline in total sales volumes for the year. The restructuring, following the acquisition in 2010 of the Smurfit Kappa bag plants in Spain, France, Italy and Poland (acquired in January 2011), has been largely completed.

The coatings and consumer packaging business continued to perform well, with underlying operating profit at similar levels to the previous year. Some margin pressure was experienced, with growth constrained by the macroeconomic environment, although variable cost increases were largely passed on to customers. Following some internal restructuring and renewed focus on higher growth and value adding products, the extrusion coating segment delivered a pleasing improvement in performance while the consumer packaging segment remained stable. The release liner segment was negatively impacted in the second half by the costs of starting up new production lines, the benefits of which are expected to be realised in 2012. The sale of Unterland, a flexible packaging business, was completed in October 2011.

South Africa Division

Underlying operating profit of €62 million was marginally down on the previous year. The ROCE of 8.9% reflects a continuing improvement, but remains short of targeted levels.

Average benchmark pulp prices declined by 4% year-on-year. While pricing held up well in the first half, the second half saw a significant decline in prices, such that the benchmark closing price for BEKP pulp was down around 23% on the level at the end of 2010. Average benchmark white top containerboard prices increased by approximately 14% year-on-year, but weaker demand towards the end of the year resulted in some commercial downtime and a somewhat weaker pricing environment. Input costs increased, mainly as a result of increased wood, energy and chemical costs.

Despite the weaker trading environment, management actions have ensured that underlying operating profit remained largely unchanged. The business benefited from the mothballing of the 120,000 tonne per annum UFP machine in Merebank and the related restructuring programme which delivered both substantial cost savings and improved margins arising from an increased focus on the domestic market. The integrated pulp and paper operation at Richards Bay achieved record saleable production in excess of 750,000 tonnes in the calendar year.

The business continues to focus on operational efficiencies and improvement opportunities with strong emphasis on energy efficiency and self generating capacity.

Newsprint

The returns of the Newsprint businesses were extremely disappointing with the segment recording an underlying operating loss of €18 million in the period.

Selling price increases were insufficient to restore the Aylesford Newsprint joint venture to profitability. In addition, the business incurred further non-recurring waste disposal costs in the second half. The poor operating performance and outlook for this business necessitated an impairment of the underlying assets with the Group’s attributable share being €33 million. Restructuring activities have been announced with further cost containment initiatives to be implemented during 2012 as a result of ongoing pricing pressure in European newsprint.

The Mondi Shanduka Newsprint joint venture in South Africa was negatively impacted by currency translation effects and rising electricity costs. The business has however concluded renewed contracts with its major domestic customers at prices which will offset input cost increases over the coming year and restore a reasonable level of profitability.

Financial review

Special items
  • Special items for the year include the following:
  • Impairment of Aylesford Newsprint joint venture assets;
  • Restructuring activities and impairment of certain assets in the Bags & Coatings business;
  • Loss on disposal of the Unterland flexible packaging business; and
  • Various other smaller adjustments relating to the finalisation of transactions from prior years.
Further detail is provided in note 4 of the enclosed extract of the audited annual financial statements.

Input costs

Wood, recovered fibre and pulp comprise approximately one third of the input costs of the Group. Wood prices increased by approximately 10% over the year. Average benchmark prices for recovered fibre increased by 28% when compared to the average price for 2010, although the benchmark price at the end of 2011 was 12% lower than that at 31 December 2010. Average prices for hardwood pulp and softwood pulp were largely unchanged through the year although this masks significant price fluctuations experienced during the year. At year end, prices were respectively 24% and 11% below the levels seen at 31 December 2010. As the Group is largely balanced in respect of pulp production and consumption, pulp prices do not have a significant impact on the Group as a whole, but do impact the performance of individual business units.

Energy and chemical costs increased across the business, with particular pressure on electricity prices in South Africa, which continued to increase at well above inflationary levels. Various initiatives to reduce dependence on purchased energy and utilise energy more efficiently are being pursued both in South Africa and at the Group’s European operations.

Currencies

The impact of exchange rates was relatively muted in 2011. The first half of the year was characterised by strengthening emerging market currencies which, coupled with relatively high levels of inflation in these jurisdictions, increased the underlying cost base of operations in those countries. This trend was largely reversed in the second half with higher levels of volatility and, on average, weakening of the emerging market currencies against the euro. Most currencies ended the year weaker against the euro than 31 December 2010 levels and weaker than the average rate applicable during the year, although there has been some strengthening of these currencies during the first weeks of 2012.

Tax

The effective tax rate before special items was 20%, compared to 25% in 2010. The main reasons for the reduction in the tax rate include the improved profitability enabling the use of previously unrecognised tax losses; increased profitability in regions with lower statutory tax rates; and the benefits of tax incentives granted in certain countries in which the Group operates, notably those related to the major Polish and Russian projects.

Non-controlling interests

The income attributable to non-controlling interests increased during the year to €70 million, reflecting mainly the increased profit contribution from 66% owned Mondi Świecie SA.

Cash flow

EBITDA from continuing operations of €964 million was €166 million higher than in 2010. The Group generated €917 million of cash from operations (2010: €778 million), notwithstanding the €68 million increase in working capital on the back of increased revenues (2010: €129 million). The cash generated has been applied to invest in the Group’s asset base and provide increased dividends to shareholders with the balance being utilised to reduce net debt.

Capital Investment programme

Excluding major expansionary investments, the Group has targeted to maintain its capital expenditure at between 60% and 80% of its depreciation charge. Including the approved strategic projects mentioned below, over the next three years, it is anticipated that total capital expenditure will approximate the Group’s depreciation charge.

The Group has approved certain energy related investments across a number of its operations. These include:
  • A bark boiler in Syktyvkar;
  • A steam turbine and recovery boiler economiser in Stambolijski;
  • A new recovery boiler in Frantschach; and
  • A steam turbine in Richard’s Bay.
The focus of these and other projects still under consideration is to improve energy efficiency and self- sufficiency whilst providing opportunities to capture additional benefits in the form of electricity sales. In addition, a de-bottlenecking project has been approved to invest in a 100,000 tonne per annum pulp dryer in Syktyvkar to further exploit the benefits of the recently completed mill modernisation programme.

The approved projects, totalling approximately €170 million in capital expenditure, are expected to generate significant benefits with returns in excess of 40%, from 2013 onwards.
A number of other similar projects are under consideration at several of the Group’s operations. If approved, these projects are expected to be completed over the next three to four years, with a total estimated capital expenditure of about €250 million.

Subsequent events

In February 2011, Mondi Świecie announced its intention to exercise an option to acquire the power and heat generating plant which supplies Mondi Świecie with the majority of its electricity requirements and all its heat and steam needs. The option was subject to certain conditions precedent, being a ruling from the Arbitration Court of the National Chamber of Commerce in Poland, consent of the financing banks of the power and heat generating plant and receipt of approval from the competition authorities. On 10 February 2012, the Arbitration Court ruled in favour of Mondi Świecie, fulfilling the first of these conditions. Competition approval has been received and application has been made to the financing banks for approval. Based on the option price, the implied enterprise value of the business is around €90 million. The outcome and timing of any potential acquisition remains uncertain.

On 16 February 2012, Mondi made an all cash offer of PLN69.00 (€16.48) per share for the 34% of Mondi Świecie S.A. shares that it does not already own. Mondi Świecie is listed on the Warsaw Stock Exchange. The maximum consideration, should all outstanding shares be acquired, is PLN1.2 billion (€280 million).

Treasury and borrowings

Net debt at the end of the year was €831 million, a €533 million reduction from the prior year end. The demerger of Mpact accounted for €172 million of this reduction whilst the balance was a result of the strong operating cash flows and the reduction in capital expenditure together with a positive currency impact of €68 million. Gearing reduced to 21.5% at the end of 2011, down from 29.7% at the end of 2010 and the net debt to 12 month trailing EBITDA ratio improved from 1.55 to 0.83 over the year.

The Group’s public credit ratings, first issued in March 2010, improved as a result of the strong financial performance. Standard and Poor’s upgraded the Group’s long-term rating to investment grade from BB+ to BBB- in October whilst Moody’s Investors Service put their Baa3 investment grade rating on positive outlook for upgrade.

The Group actively manages its liquidity risk by ensuring it maintains diversified sources of funding and debt maturities. During the year the Euro Medium Term Note programme under which the €500 million, seven year bond was issued in March 2010 was renewed allowing continued access to debt capital markets. The Group’s €1.5 billion bank facility that was due to mature in June 2012 was refinanced early with a new five year, €750 million revolving credit facility. Further diversification of funding sources was achieved with the signing of a €100 million ten year facility with the European Investment Bank (EIB) and a €40 million 11 year facility from the European Bank for Reconstruction and Development (EBRD).

At the end of the year the Group’s committed debt facilities amounted to €1.8 billion with €889 million undrawn, which together with cash of €191 million provides significant liquidity to meet short-term funding requirements. Drawn committed facilities maturing in 2012 amount to €251 million. To the extent they are not renewed, they can be financed out of existing cash and undrawn committed facilities.

Following the refinancing of the Group’s principal bank facility and the new long-term facilities from the EIB and EBRD the weighted average maturity of the Eurobond and committed debt facilities increased to 4.3 years as at 31 December 2011 compared to 2.6 years a year earlier.

Sustained delivery on Group strategy

Mondi’s strategic positioning continues to demonstrate the required combination of focus and flexibility to deliver results across the business cycle as we:
  • build on leading positions in packaging and UFP, particularly in high-growth emerging markets;
  • maintain our low-cost, high-quality asset base by selectively investing in production capacity in lower-cost regions and realising benefits from upstream integration (including forestry); and
  • focus on performance through continuous productivity improvement and cost reduction, delivered through business excellence programmes and rigorous asset management.
Leading market positions

Mondi continues to focus on achieving the right product and geographic mix in order to promote sustained profitability. The Group benefits from our exposure to faster growing emerging markets such as eastern Europe, Russia and South Africa, with 71% of the Group’s net operating assets and 50% of revenue by destination in these geographical areas. While our strategy clearly focuses on emerging markets, Mondi continues to enjoy a uniquely strong market position in the Bags & Coatings segment in both eastern and western Europe, where the coatings & consumer packaging segment enjoys attractive growth rates and returns.

High-quality, low-cost asset base

Both Mondi’s recent major capital investments, the modernisation of the Syktyvkar mill in Russia and the new lightweight recycled containerboard paper machine at Świecie in Poland, are running well and contributed significantly to the Group’s profitability in 2011. Over the past 10 years, Mondi has invested more than €4.5 billion in its high-quality, low-cost asset base and our appropriately invested operations are delivering superior returns across the cycle. Mondi’s UFP business is reaping the rewards of its integrated low-cost positioning while the restructured Corrugated business delivered strong results. The Bags & Coatings business enjoys good, and in many cases leading, market shares in its key markets and benefited from the very strong market recovery in the first half of 2011.

Focus on performance

Our relentless focus on cost containment ensured that the Group’s fixed cost increases remained within inflation in the countries we operate in. Ongoing initiatives are directed towards ensuring efficient procurement of our most critical raw materials and operational efficiency.

The ROCE of 15%, despite the challenging market conditions in the second half of the year, was significantly in excess of the 13% targeted across the cycle.

Overall, 2011 has been an extremely successful year from an operational perspective, with significant improvements in production efficiencies across the business and full year production records being set in a number of key operations.

Principal risks and uncertainties

It is in the nature of Mondi’s business that the Group is exposed to risks and uncertainties which may have an impact on future performance and financial results, as well as on its ability to meet certain social and environmental objectives.

On an annual basis, the DLC executive committee and Boards conduct a formal systematic review of the most significant risks and uncertainties and the Group’s responses to those risks. These risks are assessed against pre-determined risk tolerance limits, established by the Boards. Additional risk reviews are undertaken on an ad-hoc basis for significant investment decisions and when changing business conditions dictate.

The Group believes that it has effective systems and controls in place to manage the key risks identified below within the risk tolerance levels established by the Boards.
  • Mondi operates in a highly competitive environment The markets for paper and packaging products are highly competitive. Prices of Mondi’s key products have experienced substantial fluctuations in the past. Furthermore, product substitution and declining demand in certain markets, coupled with new capacity being introduced may have an impact on market prices. A downturn in trading conditions in the future may have an impact on the carrying value of goodwill and tangible assets and may result in further restructuring activities.

Mondi is flexible and responsive to changing market and operating conditions and the Group’s geographical and product diversification provide some measure of protection.

  • Cost and availability of a sustainable supply of fibre Fibre (wood, pulp, recovered paper) is Mondi’s most important raw material, comprising approximately one-third of total input costs. Increases in the costs of any of these raw materials, or any difficulties in procuring a sustainable supply of wood, pulp or recovered paper in certain countries, could have an adverse effect on Mondi’s business, operational performance or financial position.

The Group’s focus on operational performance, relatively high levels of integration and access to its own FSCTM certified virgin fibre in Russia and South Africa, serve to mitigate these risks. It is the Group’s objective to acquire fibre (wood and pulp) from sustainable sources with internationally credible certification and to avoid any illegal or controversial supply.

  • Foreign currency exposure and exchange rate volatility The location of a number of the Group’s significant operations in a range of different countries results in foreign currency exposure. Adverse currency movements and high degrees of volatility may impact on the financial performance and position of the Group. The most significant currency exposures are to the South African rand, Russian rouble, Czech koruna, Polish zloty, Swedish krona and Turkish lira.

The Group’s policy is to hedge balance sheet exposures against short-term currency volatility. Furthermore, the Group’s geographic diversification provides some level of protection.

  • Investments in certain countries may be adversely affected by political, economic and legal developments in those countries The Group operates in a number of countries with differing political, economic and legal systems. In some countries, such systems are less predictable than in countries with more developed institutional structures. The current macroeconomic uncertainties in the Eurozone have heightened the political and economic risks in this region. Significant changes in the political, economic or legal landscape of any country in which the Group is invested may have a material effect on the Group’s operations in that country.

The Group has invested in a number of countries thereby diversifying its exposure to any single jurisdiction. The Group’s diversified management structure ensures that business managers are able to closely monitor and adapt to changes in the environment in which they operate. The Group continues to actively monitor its exposure to the Eurozone environment.

  • Employee attraction, retention and safety The complexity of operations and geographic diversity of the Group demands high quality, experienced employees in all operations.

Appropriate reward and retention strategies are in place to attract and retain talent at all levels of the organisation. Mondi has a policy of working towards zero-harm. Incidents are fully investigated, remedial actions taken and early warning indicators used to direct preventative work. Mondi adopts internationally recognised safety and health management systems across all its operations.

  • Capital intensive operations Mondi operates large facilities, often in remote locations. The on-going safety and sustainable operation of such sites is critical to the success of the Group.

Mondi’s management system ensures on-going monitoring of all operations to ensure they meet the requisite standards and performance requirements. A structured maintenance programme is in place under the auspices of the Group technical director. Emergency preparedness and response procedures are in place and subject to periodic drills. Mondi has adequate insurance in place to cover material property damage, business interruption and liability risks.



Going concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the business review. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial statements. In addition, the notes to the integrated report and financial statements 2011 will include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit and liquidity risk.

Mondi’s geographical spread, product diversity and large customer base mitigate potential risks of customer or supplier liquidity issues. Ongoing initiatives by management in implementing profit improvement initiatives which include plant optimisation, cost-cutting, and restructuring and rationalisation activities have consolidated the Group’s leading cost position in its chosen markets. Working capital levels and capital expenditure programmes are strictly monitored and controlled.

The Group meets its funding requirements from a variety of sources as more fully described in note 10 of the enclosed extract of the audited annual financial statements. The availability of some of these facilities is dependent on the Group meeting certain financial covenants all of which have been complied with. Mondi had €889 million of undrawn committed debt facilities as at 31 December 2011 which should provide sufficient liquidity in the medium term.

The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, including an assessment of the current macroeconomic environment, particularly in Europe, indicate that the Group should be able to operate well within the level of its current facilities and related covenants.

The directors have reviewed the overall Group strategy, the budget for 2012 and subsequent years, considered the assumptions contained in the budget and reviewed the critical risks which may impact the Group’s performance. After making such enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

Dividend

The Boards’ aim is to offer shareholders long-term dividend growth within a targeted dividend cover range of two to three times over the business cycle. Given the strong financial performance, good cash generation and the Boards’ stated desire to increase distributions to shareholders, the Boards are pleased to recommend a significant increase in the full year dividend.

The boards of Mondi Limited and Mondi plc have recommended a final dividend of 17.75 euro cents per share (2010: 16.5 euro cents per share), payable on 10 May 2012 to shareholders on the register at 13 April 2012. Together with the interim dividend of 8.25 euro cents per share, paid on 13 September 2011, this amounts to a total dividend for the year of 26.0 euro cents per share. In 2010, the total dividend for the year was 20.0 euro cents per share. Both the interim and final dividends are based on the consolidated number of Mondi Limited shares following completion of the share consolidation in August 2011.

Outlook

Looking ahead, while macroeconomic risks remain, it is encouraging to note that in recent weeks order books have improved and prices have stabilised, with price increases announced in certain grades. This should allow some recovery of price declines experienced over the course of the second half of 2011, although recent strengthening of emerging market currencies is impacting margins.

Supply side fundamentals in our core grades remain good following further announcements of capacity closures in the industry. Mondi’s integrated low-cost operations, emerging markets exposure and unrelenting focus on sustainable performance ensure that the Group remains well positioned to continue generating strong cash flow through the cycle and adding value for shareholders over the longer term.

Industry Intelligence Editor's Note: In an omitted table, Mondi reported full year net income of €330 million and net sales of €5.74 billion. For the same period a year ago the company recorded net income of €224 million and net sales of €5.61 billion.

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